Sustained government capex, softness in global commodity prices, and green shoots in the private corporate capex cycle will help the Indian economy grow 6.5% in FY25, lower than the 6.9% projected for this fiscal year despite global headwinds, India Ratings and Research said Thursday.
“Despite the base effect, the sequential GDP growth indicates that the economic recovery is on track due to the sustained government capex, healthy corporate performance, deleveraged corporates/banking sector balance sheet, continued softness in global commodity prices, and the prospect of a new private corporate capex cycle,” the rating agency noted.
Ind-Ra’s forecast aligns with the IMF’s 6.5% projection for the coming year but is lower than RBI’s estimate of 7%.
The rating agency upped its FY24 forecast to 6.9% from 6.7% projected earlier, as it noted that a build-up in the economy owing to prevailing weather conditions in the North would push agriculture and consumption demand.
The rating agency expects the economy to grow 6.5% in the third quarter. The government will release second advance estimates for FY24 GDP and third-quarter growth numbers on February 29.
Indian economy grew 7.3% in FY24, as per the first advance estimates released last month.
The rating agency flagged trade distortions and geo-political fragmentation as risks to exports, noting that skewed consumption demand by upper-income households could also have an impact.
Besides, it noted that rising wholesale inflation could impact gross value added and corporate profitability.
“A rise in input cost, if not adequately passed into output prices, will reduce value addition/corporate margin. Given that consumption is not broad-based, producers will find it difficult to pass on the higher input cost to output prices.”, said Sunil Kumar Sinha, principal economist, Ind-Ra.
Wholesale inflation is expected to rise to 2.2% in FY25 compared with -0.6% in FY24, according to Ind-Ra.
The agency projects consumer inflation to ease to 4.8% compared with 5.5% in this fiscal.
“Ind-Ra believes RBI will remain cautious and watchful and is unlikely to change either the stance or the policy rate anytime soon. If monsoon remains normal in 2024 and there are no adverse weather/ geopolitical events, then the RBI may resort to monetary easing in 2HFY25,” it said.
While the agency pointed to service recovery as a positive, especially in new sunrise sectors like global capability centres and fintech, it pointed out that monsoon and industrial growth could remain areas of concern.
On the fiscal front, Ind-Ra was hopeful of the government meeting its 5.1% fiscal deficit target due to robust growth in tax collections.
It projects the current account deficit to remain contained at 1.4%, but the rupee will depreciate further to 85.59 against the dollar by the end of next fiscal.
